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Working Paper
A model of the Twin Ds: optimal default and devaluation
This paper characterizes jointly optimal default and exchange-rate policy in a small open economy with limited enforcement of debt contracts and downward nominal wage rigidity. Under optimal policy, default occurs during contractions and is accompanied by large devaluations. The latter inflate away real wages, thereby avoiding massive unemployment. Thus, the Twin Ds phenomenon emerges endogenously as the optimal outcome. In contrast, under fixed exchange rates, optimal default takes place in the context of large involuntary unemployment. Fixed-exchange-rate economies are shown to have ...
Working Paper
Computerizing Households and the Role of Investment-Specific Productivity in Business Cycles
Advancements in computer technology have reshaped not only business operations but also household consumption. We estimate a business-cycle model disaggregating consumer IT and non-IT durable goods from the capital stock. We find that shocks to the supply of IT durables account for more than half of the variation in house- holds' real expenditure on IT durables. Furthermore, investment-specific productivity shocks drove nearly half of the rapid growth in household durable expenditures during the 2000s. Nonetheless, they have small influence over output dynamics, because unlike business ...